David Evanson and Oliver Pursche
Minyanville.com, Fall, 2012
I don’t really care all that much for hedge funds. While the world has gone gaga over them, they’ve only struck amusement in me. In fact, I don’t even see hedge funds as an asset class per se. To me, theyzzre more of a fee structure than anything else.
Mind you, some of my friends are hedge fund managers. And in what I would call a brain drain on our economy, some of the smartest people I know work at hedge funds. Accordingly, when they share their views on the market (as you will see below) I listen, and I think others should listen, too.
However, the way in which I was privileged to learn these views is noteworthy and bears telling, since it’s a bright spot in the reputation of an industry that could use a little burnishing. Once a year, the industry bands together in something called Trading Day for Kids, a one-day fundraising event that provides a vehicle for hedge fund and other institutional investors to improve the lives of at-risk children and youth in New York City. Specifically, on October 25, the hedge fund community will do all their trading, en masse, through one broker – this year, it will be Canaccord Genuity – that in turn will donate all of the commissions to Youth, I.N.C., which is a sort of uber charity that redistributes the funds to some really terrific non-profits throughout the city.
My only complaint: I wish this would happen more than once a year. Regardless, if you have influence over a hedge fund, use it for the greater good on October 25.
To drum up support for Trading Day for Kids, three of the industry’s most celebrated denizens — Steve Einhorn, vice chairman and portfolio manager for Omega Advisors; Harvey Eisen, chairman of Oak Advisors; and Michael Novogratz, a principal with Fortress Investment Group — appeared at a Canaccord Genuity-sponsored panel for investors and journalists.
To cut to the chase, all three investors are bullish for next year, and bullish long term. Though they got there in different ways, at the core of their opinion was a belief that QE III will ultimately lift the prices of equities.
Mind you, no one endorsed QE III as a good way to jump-start the economy. Their reasoning stemmed more from the belief that QE III made the economics of pension fund investing unsustainable, and that a lot of money would ultimately migrate from fixed income into equities.
This flow is anything but small potatoes. Currently pension funds are the stewards of some $10 trillion in retirement fund assets. By comparison, the aggregate market capitalization of NYSE equities is approximately $15 trillion. The math is compelling.
Still, he said the economics for pension fund managers are daunting. “If they are earning 2% in fixed income investments and paying out 7%, they are losing 5%. This is not sustainable, and assets will migrate.”
In an informal poll led by Einhorn, the largest percentage of the people in the room (other hedge fund investors) felt that in 2013, European equities would provide the greatest return, a view he endorsed (as do I). The thinking in the room seemed to be summed up by Fortress’s Novogratz, who said that the fear of an implosion in Europe has — through the deft political machinations of German Chancellor Angela Merkel — been avoided with the European Central Bank’s aggressive bond-buying plan: “A huge overhang has left the market with the perception that Europe will not implode.”
For a good part of this year, Izzve held the view that European multinational equities offer investors what I like to call the Pessimist’s Premium. That is, there are several large companies in Europe that do business all over the world… but because of their location in Europe, these companies have low stock prices and consequently higher yields. Under this reasoning, it’s not Chevron (NYSE:CVX) yielding 3.1%, but Total S.A. (NYSE:TOT) yielding 4.5%. Itzzs not Pfizer (NYSE:PFE) yielding 3.7%, but Novartis (NYSE:NVS) yielding 4.1%. You get this picture. Unilever (NYSE:UL), Leggett & Platt (NYSE:LEG), and Royal Dutch Shell (NYSE:RDS.A) also made the list.
I’m glad my hedge fund brethren are bullish. While I agree with their sentiments about the bullish direction of the market (perhaps because I am a long only investor), I see some more immediate bumps in the road. The warnings issued by FedEx (NYSE:FDX) and Norfolk Southern (NYSE:NSC) really spook me. And I don’t think QE III will solve the employment problem. With difficult year-over-year earnings comparisons coming this quarter and the next, well… either take some risk off the table, or hold onto your hat.
That said, the strategy of capturing the Pessimist’s Premium could prove to be extra lucrative if these hedge fund investors are right and European equities turn out as the place to be.